For all the lamentation for the rupee that one hears lately, one assumes there’s none from the small minority of investors who have put at least some of their investments in international funds. There aren’t too many of them--in the nine years since the government allowed Indian mutual funds to invest abroad, no more than Rs 2,400 crore of assets are there in such funds. Over much of the last two years, the returns of most Indian mutual funds that invest in foreign equities have handily beaten Indian equity mutual funds.
You’d think that the obvious reason for this is the decline of the rupee and that this is a good enough reason for investing in such funds, but that’s not really true. Sure, the rupee’s decline has played a large role in the relative outperformance of international funds. However, windfall exchange rate gains should not be the main reason for investing in foreign funds. The right reason is, and always has been, geographical diversification. This may look more justifiable today but it’s something that investors should have done on principle ever since it first became possible for Indians to do so.
For much of the period for which easy international investing through mutual funds has been possible, Indian investors haven’t paid much attention to it because the Indian stock markets were doing much better than others. And since investors start with a bias for the familiar, they haven’t paid any attention to the fact that slowly but surely, a combination of equities performance and the rupee’s decline has made the logic of such diversification stronger and stronger. Through these years, while big businesses and the super-rich have responded robustly to the easing of capital outflow, the opportunity has mostly been ignored by the smaller investor.
Part of the blame also lies with the kind of international funds that the Indian fund industry has launched. Ideally, buying some amount of foreign equities should just have been added to the mandate of diversified equity funds. The point of equity mutual funds is that the investor should be able to offload investment management to the fund manager. As such how much of a diversified equity basket should go to domestic stocks and how much to American or European stocks is a decision that is best made by the fund manager, just as the decision of how to allocate between different sectors or companies.
However, a large proportion of the actual international funds launched are specialty funds, or gimmick funds, to give them a more appropriate name. Instead of diversified funds (whether actively managed or indexed) based on the major markets of the world, we have global real estate or agribusiness or mining funds or Latin American or China funds and such. These are just marketing gimmicks that have shifted the onus of deciding whether Latin American real estate will do better or Chinese agribusiness will do better to the investor. There are 32 international equity funds in India, out of which just 10 are diversified.
Even if you think that the rupee has fallen too much or that Indian equities are bound to recover, don’t try to time your personal global diversification on that basis. Regardless of what you think of the news you read every day, you should diversify and invest globally to the extent that the government allows. After all, one doesn’t really know today how long will it continue to do so!
Curiously, when I once earlier wrote about investing abroad I got a surprising amount of mail from people who thought that it was somehow unpatriotic to do so. Today, they’ll probably think it be doubly so. However, this is an absurd argument. If we expect foreigners to invest here, then there can’t be anything wrong with Indians investing abroad. And even you accept the foreign exchange saving mindset, surely it’s better to invest abroad than to buy the imported goods. When you invest, it’ll eventually come back with returns. So if you want to save foreign exchange, just drive less. But do diversify your investments all over the world.